IMF cautions on timing of UK rate cut

IMF cautions on timing of UK rate cut

The Bank of England has hinted that it could cut interest rates this summer
The Bank of England has hinted that it could cut interest rates this summer. Photo: HENRY NICHOLLS / AFP/File
Source: AFP

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The International Monetary Fund on Tuesday said the Bank of England should be mindful over when to start cutting interest rates or risk harming an economy recently out of recession.

The warning came as the IMF ramped up its UK economic growth forecast but warned over "difficult" fiscal choices to stabilise debt, as beleaguered Prime Minister Rishi Sunak's Conservatives trail the main opposition Labour party in opinion polls before a general election this year.

The BoE this month signalled a summer rate cut, after holding borrowing costs at a 16-year peak of 5.25 percent to further dampen price rises.

"As monetary policy reaches an inflection point, the timing and pace of rate cuts must carefully balance the risks of premature and delayed easing," the IMF cautioned in its latest outlook document.

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Premature easing could risk further stoking inflation -- but delayed easing could "stall or even reverse" economic recovery, the IMF said.

The BoE began a series of rate hikes in late 2021 to combat inflation, which rose after countries emerged from Covid lockdowns and accelerated following Russia's invasion of Ukraine in February 2022.

UK inflation peaked at 11.1 percent in late 2022 and has decelerated since then, reaching 3.2 percent in March. April data is due on Wednesday.

It remains above the BoE target of two percent.

Britain's gross domestic product is forecast to grow 0.7 percent this year, the IMF predicted, faster than the 0.5 percent it predicted in April.

It is then anticipated to expand by a solid 1.5 percent in 2025, according to the Fund.

"The UK economy is approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025," the IMF added.

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Recent data showed the economy emerged from a short-lived recession with better-than-expected 0.6-percent growth in the first quarter.

That came after Britain's economy shrank slightly for two quarters in a row in the second half of 2023, meeting the technical definition of a recession.

'Turned corner'

British finance minister Jeremy Hunt welcomed the IMF update, noting that "independent international economists agree that the UK economy has turned a corner".

"The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years -- so it is time to shake off some of the unjustified pessimism about our prospects," added Chancellor of the Exchequer Hunt.

The institution did, however, sound a warning over Britain's longer-term growth outlook.

Those prospects "remain subdued due to weak labour productivity and somewhat higher-than-expected inactivity levels due to long term illness, only partly offset by higher migration numbers".

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The IMF also warned that "difficult choices will need to be made over the medium term to stabilise public debt" with public services and investment levels under "significant pressures".

Source: AFP

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